Landlords and tenants must take great care when entering into leases of business premises. It is fundamental that the parties understand their rights at the end of the contractual term of the lease – do they want the lease to be protected or do they need contract out?
What is the Landlord and Tenant Act 1954?
The Landlord and Tenant Act 1954 (“1954 Act”) provides tenants of business premises with ‘security of tenure’ – the automatic right to renew the lease at the end of the agreed contractual term. The landlord can only oppose the renewal on specific and limited grounds.
What is contracting out?
The landlord and tenant can, together, choose to contract out if they do not want the lease to be protected by the 1954 Act. Both parties will have to decide whether to exclude the 1954 Act when negotiating terms of the lease. The effect of contracting out means the lease will terminate, and the tenant must leave the property, at the end of the contractual term.
Why might it be important for a landlord to contract out?
A landlord will usually want to exclude the 1954 Act because they will not be obligated to offer the tenant a new lease when the current one has expired. They will want the freedom to decide what they want to do with property at the end of the contractual term. Even if they offer a new lease to the existing tenant, they can do so on new terms. The landlord will ultimately have the decision to do as they wish with the property.
Why might a tenant want a protected lease?
A protected lease gives the tenant the security of knowing they cannot easily be removed from the property once the contractual term has ended. This can be important to a tenant who may have been trading at the property for a long time and have built themselves a reputation in the location. Tenants with this concern may want to enter into a lease where they have the comfort of knowing that the landlord is obliged to offer a lease renewal.
What is the procedure for contracting out?
It is essential that the procedure for contracting out of the 1954 Act is done correctly. The procedure involves a notice being served by the landlord to the tenant. The tenant must make a declaration confirming that they have received the notice and understood the exclusion of the 1954 Act.
Conclusion
Whether a lease will be contracted out, will depend greatly on the circumstances and the terms agreed. Tenants may be reluctant to enter into long-term leases without the protection of a lease renewal at the end of the contractual term.
However, short-term leases offer flexibility for both parties and, in such cases, the 1954 Act is commonly contracted out for that reason.
Both parties must understand the effects of entering into a contracted-out lease and where it is appropriate. Thinking ahead to when the lease expires means the lease is more likely to meet the potential needs and requirements of the landlord’s and tenant’s business.
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